What happens to debts when someone dies?

We are often told about the importance of estate planning and making a will, about dying intestate or our assets being subject to inheritance tax. But what happens if we die with debt? Is it true that debt dies with us, or will our families be burdened with them?

Age UK estimate that around one in 50 people over the age of 70 have a debt problem*, which means dying with debt is a very real possibility.

If you are worried that you may be passing debts to your loved ones, or if you aren’t sure how to cope with the debts of someone who has passed away, we explain below.

Make it as simple as possible

All debts will need to be dealt with by the executor of the estate. Monies owed can be listed along with other important information in our Little Book of Life, which can make it easier for executors to gather all of the information they’ll need, as long as they know where to find it! This way, the executor can inform all creditors of the death.

Joint Debts

In most circumstances, the responsibility of paying joint debts will transfer solely to the surviving debtor, but there are some exceptions. Some of the most common types of joint debt are listed below.

  • Mortgages – Some mortgage providers require a life insurance policy to be taken at the same time as the mortgage, which should cover the remaining payments on the death of one mortgage holder. If this is not the case, the remaining mortgage would become the sole responsibility of the surviving mortgage holder.
  • Joint loans and overdrafts – All remaining debts on joint loans and overdrafts become the sole responsibility of the remaining person named on the account. If Payment Protection Insurance (PPI) has been taken out on the debt, this may cover the event of a death so check the small print.
  • Household bills, rent arrears and tax (such as Council Tax) – These become the responsibility of anyone else living in the property at the same time as the deceased, even if they were not named on the bill.

If regular payments for a joint debt come out of one account, it’s important to ensure the other named person can access this, or change it. If one person named on the debt dies and the payments are rejected or fail due to a frozen account, it may cause the loan to default.

Individual Debts

As above, personal loans, overdrafts and credit cards may have PPI attached which pays out in the event of a death and mortgages may have a life insurance policy. If this is the case, the executor will need to make a claim to write off the debt.

For other types of debt, or where there is no policy in place, the value of debt owed should be included when the executor applies for probate of the estate along with the total value of all assets. Any Inheritance Tax on the estate must be paid before probate is granted.

Paying off the debt

Once probate is granted, any outstanding debts must be paid before the executor is able to distribute any assets to beneficiaries. In some cases, assets including property may need to be sold in order to pay debts.

If the total value of the estate is not large enough to clear the total amount of debt, the estate is classed as insolvent.

The estate must be used to pay off as much as possible, in order of priority (see below). If any creditors are not contacted, or debts are paid in the incorrect order, the executor may become personally liable for outstanding debt; therefore legal advice should be sought when dealing with an insolvent estate.

The order of priority:

  • Mortgages and secure personal loans (secured debt)
  • Funeral costs and administration of the estate
  • Unsecured loans including credit cards, tax and rent arrears, unpaid bills.

As long as an estate is dealt with correctly and the executor has attempted to contact all known creditors, they are not allowed to hold anyone else responsible for unpaid debts and cannot demand payment from family members or the executor.

If you are worried about the possibility of leaving debt behind, it may be a good idea to review your insurance policies. To review your protection planning arrangements, get in touch to book an appointment with a Financial Planning Adviser from Newcastle Financial Advisers †.

Speak to an adviser on 0345 600 4488 to find out more.

*Source: www.bbc.co.uk/news/business-27732054 (2014)

† Newcastle Building Society introduces to Newcastle Financial Advisers . Newcastle Financial Advisers is an appointed representative of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority